The book is organized around three main themes, Enterprise systems, E-business and Controls and how these systems and the controls for these systems relate to the study of accounting information systems. Below are definitions and examples of these three themes: Enterprise Systems: integrate the processes and transaction cycle data from all of the organization's functional areas. In order to successfully implement an enterprise system, it is necessary to have a thorough understanding of how the organizations processes work. This is why perfectly designed data flow charts are so important.
Enterprise Resource Planning (ERP) Systems are comprehensive software packages that incorporates the business processes (transaction cycle) and information from all functional areas of an organization, such as purchasing, cash receipts, human resources, production and logistics, and business reporting (including financial reporting). E-Business (Electronic Business): the use of electronic networks to facilitate information sharing and to connect business processes between both individuals and organizations. E-business streamlines the business process and communication allowing businesses to conduct tasks more efficiently. The internet is example of e-business. Think of all the goods and services that are provided over the internet. For example, by logging into your "MyUCF" account, you can view your class schedule and order your textbooks online. This is by far more efficient than getting in your car and driving to the university bookstore where you must pummel your way through the crowd of students trying to get that last needed textbook. Another example of an e-business is Amazon.com because the process for searching for books is simple and you can buy books at lower prices than a regular bookstore. Amazon saves a customer the hassle of having to go to many bookstores to find the books they want. Ebay is another example of an e-business because it saves a customer time and hassle from going from store to store looking for a specific product. With Ebay, a customer can log on, find the product they want, and enter their price they are willing to pay. The entire transaction is done electronically so it saves a customer time. Controls (Internal Control) is a process designed to provide reasonable assurance concerning the achievement of the following objectives: effectiveness and efficiency of operations, reliability of financial reporting, compliance with applicable laws and regulations, and the safeguarding of valuable organizational resources. An example of an internal control is segregation of duties. A more specific example of a control is making sure that the person who collects the cash is not the one who completes the bank reconciliation each month. It is important to have several people involved in order to ensure that the internal controls are in place to avoid or reduce fraudulent activity. Remember that management has the overall responsibility for designing and implementing internal controls for an organization in order to achieve certain objectives and monitor performance. Accountants/auditors are merely required to test and report on the effectiveness of internal controls. As such they too must have a clear understanding of an organization's business processes and underlying controls. The subject of Internal Control has been a hot topic as a result of the numerous cases of corporate malfeasance that arose during the late 90's and early 2000's. The Sarbanes-Oxley Act of 2002 put into place legislation that requires organizations' management to address their internal controls. In order to assure that organizations are following the requirements of SOX, the legislation requires that the organizations have their internal controls verified by independant auditors.
Challenges and Opportunities:
Being a CPA is much different today than it was 20 years, 10 years or even 5 years ago. Instead of the green eye-shaded bean counter, accountants today have much more dynamic roles. Not only has the role of the accountant changed but the environment in which accountants work has changed and continues to change rapidly. This rapid change in business environments, driven by Information Technology, does not appear to be slowing down. Thus presenting the CPA of today and tomorrow with new challenges and opportunities. Below these are described:
Broad View of AIS:
The AIS wheel consists of 10 elements, these can be defined as:
Technology - Technology plays an important part in planning and managing business operations in today's society. In order to completely understand accounting information systems, a knowledge of technology is necessary. It goes without saying that technology ultimately provides the foundation for business operations and accounting information systems.
Databases - Databases can be private or public and can vary based on the quantity and type of data they provide and by the methods used in retrieving data from them. It is important for accountants to be able to pull information from databases to perform analysis on the information and prepare that information for management decision making. There are two types of databases, databases that are used for storing transactions. These databases are said to support online transaction processing (OLTP). The other type, called datawarehouses, only support querying. Transactions cannot be recorded to them. They are said to support online analytical processing (OLAP).
Reporting - It is important for an accountant to know what outputs are required when designing reports from information systems. Reports tend to support management decisions and fulfill reporting obligations.
Control- The means by which we make sure the intended actually happens (p.10,11)
Business Operations - Examples include hiring employees, purchasing inventory, and collecting cash from customers. Accounting information systems operate with these business operations whereas AIS inputs are prepared by operating departments and outputs are often used to manage operations.
Events Processing - Examples include sales and purchases events that occur as organizations carry out their business operations. It is important that data is collected about these events and recorded to monitor business operations. The events have operational and AIS aspects. To design and use the AIS, an accountant must know what event data are processed and how they are processed.
Managment Decision Making- Decisions or choices such as what products to sell, which markets to sell them in, what organizational structure to use, and how to direct and motivate employees. -- Can be broken down into 3 step process: 1: Intelligence 2: Design 3: Choice (p.27) -- Information is more useful if it recgonizes the personal management styles and prefrences of the decision maker (p.12). The above three elements: business operations, events processing, and management decision making comprise a major focus of business processes
Systems Development and Operation- Designing, implementing, and effectively operating information systems. Choosing the data for a report and designing that report or configuring an enterprise system are examples of systems development tasks that can be accomplished by an accountant.
Communications- the effective exchange of ideas and information between individuals. In order for accountants to express the results of their examination or inquiry effectively to management, they must have strong written and verbal communication skills.
Accounting and Auditing Principles- procedures established for accountants to follow concerning accounting information that is subjected to an audit. In order for an accountant to design and operate the system containing this accounting information, they must understand and recognize proper accounting procedures.
Narrow View of AIS:
Here we focus on the accounting information system itself (the database, the ERP system, the information system) Systems - set of interdependent elements that together accomplish specific objectives (pg 11). A system must have organization, interrelationships, integration, and central objectives. A system's basic objectives depend on its type: natural, biological, or man-made and on the particular system. Subsystems - each part of a system. (pg 11) NOTE: When a subsystem is further divided into another subsystem, the subsystem A is called System A, when referring to the new subsystem. For example, canines would be a subsystem of the system mammals; and in this instance, mammals would be System A and canines would be Subsystem A. Then, we could say that Bulldogs would be a subsystem of the system canines; and in this instance, the System A would be canines and the subsystem A would be Bulldogs. Information Systems Model or Management Information System - a man-made system generally consisting of an integrated set of computer-based components and manual components established to collect, store and manage data and to provide output information to users. (pg 13) Accounting Information System - specialized subsystem of the IS for the purpose of collecting, processing and reporting information related to the financial aspects of business events. Like the Information System (IS), the AIS may be divided into components based on the operational functions supported.
Logical Model of a Business Process:
(p.17-18) There are three logical components of the business process:
1) Information process - the portion of the overall information system related to a particular system. Information processing includes data processing functions related to economic events such as accounting events, internal operations such as manufacturing, and financial statement preparation such as adjusting entries.
2) Operations process - a man-made system consisting of the people, equipment organization, policies, and procedures whose objective is to accomplish the work of the organization. Typically include production, personnel, marketing and sales, accounting, finance, warehousing, and distribution.
3) Management process - a man-made system consisting of people, authority, organization, policies and procedures whose objective is to plan and control the operations of the organization. Planning, controlling, and decision making are the three most prominent management activities.
IS serves two important functions within an organization:
1. Mirrors and monitors actions in the operating system by processing, recording, and reporting business events.
2. Support management activities, including management decison making. The IS accomplishes this by collecting information and organizing in a manner that can be used by management to make informed decisions.
Management Uses of Information:
1. To monitor and keep operations running smoothly - the use of information generated and processed by the IS to ensure that events are operating correctly; ie Managers use the information to make sure enough inventory is being produced each day to meet expected demand = keeping the "ship" on course. (p17)
2. To achieve satisfactory results for both customers and shareholders - The information generated by the IS can measure several things such as the attainment of goals regarding product quality, timely delivers, cash flow, operating income, etc. (p17)
3. To recognize and adapt to changing environmental trends- The Information from the IS helps managers to answer key questions such as: the time it takes to introduce a new product compared to the time it take competitors or the cost to manufacture a unit compared to the competition. (p17)
Data vs Information:
Data- facts or figures in raw form. Data represent the measurements or observations of objects and events. To become useful to a decision maker, data must be transformed into information.
Information- data presented in a from that is useful in decision making (p17). It has value to the decision maker because it reduces uncertainty and increased knowledge about a particular area of concern. Should be useful in decision making.
Qualities of Information:
Statement of Financial Accounting Concepts No 2: Qualitative Characteristics of Accounting Information
Understandability - Enables users to perceive the information's significance. Information must be presented in proper language that allows the decision maker to easily gather information and make informed decisions. Acronyms, slang or codes are usually difficult to understand by multiple decision makers.
Timeliness - A decision maker must receive information prior to the deadline of taking action. If information is received after the deadline, the information is no longer relevant or significant. All pertinent information needs to be available when needed and not after the fact. Availibility of information can increase timeliness.
Predictive Value & Feedback Value-Information systems are designed to provide appropriate performance measurement data to assess the past, present, and future financial condition of the organization. These qualitites improve a decision maker's capacity to predict, confirm, or correct earlier expectations. Information can have both values because knowledge of the outcomes of actions already taken will generally improve a decision maker's abilities to predict the results of similar future actions.
Verifiability- being able to compare measurement of data using independent methods.
Neutrality (freedom from Bias) - Information must be impartial and not favored more toward one side or another.
Comparability-representing data like another to establish similarities. The information quality that enables users to identify similarities and differences in two pieces of information. Information is consistent when you can compare information about the same object or event collected at two points in time.
Consistency-In accordance to principles, information should be recorded the same within the current period and as the preceding period.
Validity-Information regarding actual occurrences and actual items is considered valid.
Accuracy - Information should reflect actual events and not material misstatements. For example, accounts receivable balances and accounts payable balances should represent the correct balance and should differ significantly.
Completeness - All relevant events that should have been included in the information were included, and no relevant transactions were left out by either neglect or by mistake.
Effectiveness - Effectiveness of information must be evaluated in relation to the purpose to be served--decision making. It is a function of the decisions to be made, the method of decision making to be used, the information already possessed by the decision maker, and the decision maker's capacity to process information.
Relevance - Information is relevant when it is capable of making a difference in a decision-making situation by reducing uncertainty or increasing knowledge for that particular decision. It is a primary component of appropriateness.
NOTE: It is virtually impossible to simultaneously achieve a maximum level for all the qualities of information. In fact, for some of the qualities, an increased level of one requires a reduced level of another.
Management Decision Making:
- Decision making - process of making choices; central activity of all management.
- One of the purposes of an IS to to support management decision making.
- Herbert Simon - 3 step Process (see figure 1.8 on page 23 of the textbook)
Intelligence: searching for conditions calling for a decision
Design: creating possible courses of action
Choice: selecting a course of action
Operational Management Requirements - summarized and detailed version of information that flows horizontally; used to monitor daily functioning of specific operating units.
Tactical Management Requirements - more summarized, broader in scope, does not need to be as accurate as information used by operations management.
Strategic Management Requirements - more summarized and broader in scope than the needs of tactical management reports; usually comes from outside the organization; relates to longer time periods, concerned with projection of future events and conditions; examples include external financial statements and annual sales reports.
The Data Flow of Business Process Events
Vertical information flows: summarized version of the information that flows horizontally that puts transactional data into a useful report; flows up and down through the functional areas from operations up to strategic management. Information starting at the bottom in operations and business event processing is more structured and defined. The higher the information flows, the more summarized the information becomes as decisions are less defined.
Horizontal information flows: narrow in scope, detailed, accurate; relate to specific business events such as one purchase order or one cash deposit and are transactional in nature; information usually comes from within the organization and provides support for the vertical information flows up to different levels of management.Encompasses day to day work at an operations level.
Structured vs Unstructured Decisions
Structured - the use of all three decision phases (intelligence, design and choice) on a routine or repetitive basis. These decisions are able to be automated using pre-defined rules which trigger an automatic decision.
Unstructured - a decision where none of the decision phases are routine or repetitive
Main Themes:
The book is organized around three main themes, Enterprise systems, E-business and Controls and how these systems and the controls for these systems relate to the study of accounting information systems. Below are definitions and examples of these three themes:Enterprise Systems: integrate the processes and transaction cycle data from all of the organization's functional areas. In order to successfully implement an enterprise system, it is necessary to have a thorough understanding of how the organizations processes work. This is why perfectly designed data flow charts are so important.
Enterprise Resource Planning (ERP) Systems are comprehensive software packages that incorporates the business processes (transaction cycle) and information from all functional areas of an organization, such as purchasing, cash receipts, human resources, production and logistics, and business reporting (including financial reporting).
E-Business (Electronic Business): the use of electronic networks to facilitate information sharing and to connect business processes between both individuals and organizations. E-business streamlines the business process and communication allowing businesses to conduct tasks more efficiently. The internet is example of e-business. Think of all the goods and services that are provided over the internet. For example, by logging into your "MyUCF" account, you can view your class schedule and order your textbooks online. This is by far more efficient than getting in your car and driving to the university bookstore where you must pummel your way through the crowd of students trying to get that last needed textbook. Another example of an e-business is Amazon.com because the process for searching for books is simple and you can buy books at lower prices than a regular bookstore. Amazon saves a customer the hassle of having to go to many bookstores to find the books they want. Ebay is another example of an e-business because it saves a customer time and hassle from going from store to store looking for a specific product. With Ebay, a customer can log on, find the product they want, and enter their price they are willing to pay. The entire transaction is done electronically so it saves a customer time.
Controls (Internal Control) is a process designed to provide reasonable assurance concerning the achievement of the following objectives: effectiveness and efficiency of operations, reliability of financial reporting, compliance with applicable laws and regulations, and the safeguarding of valuable organizational resources. An example of an internal control is segregation of duties. A more specific example of a control is making sure that the person who collects the cash is not the one who completes the bank reconciliation each month. It is important to have several people involved in order to ensure that the internal controls are in place to avoid or reduce fraudulent activity. Remember that management has the overall responsibility for designing and implementing internal controls for an organization in order to achieve certain objectives and monitor performance. Accountants/auditors are merely required to test and report on the effectiveness of internal controls. As such they too must have a clear understanding of an organization's business processes and underlying controls. The subject of Internal Control has been a hot topic as a result of the numerous cases of corporate malfeasance that arose during the late 90's and early 2000's. The Sarbanes-Oxley Act of 2002 put into place legislation that requires organizations' management to address their internal controls. In order to assure that organizations are following the requirements of SOX, the legislation requires that the organizations have their internal controls verified by independant auditors.
Challenges and Opportunities:
Being a CPA is much different today than it was 20 years, 10 years or even 5 years ago. Instead of the green eye-shaded bean counter, accountants today have much more dynamic roles. Not only has the role of the accountant changed but the environment in which accountants work has changed and continues to change rapidly. This rapid change in business environments, driven by Information Technology, does not appear to be slowing down. Thus presenting the CPA of today and tomorrow with new challenges and opportunities. Below these are described:Broad View of AIS:
The AIS wheel consists of 10 elements, these can be defined as:Narrow View of AIS:
Here we focus on the accounting information system itself (the database, the ERP system, the information system)Systems - set of interdependent elements that together accomplish specific objectives (pg 11). A system must have organization, interrelationships, integration, and central objectives. A system's basic objectives depend on its type: natural, biological, or man-made and on the particular system.
Subsystems - each part of a system. (pg 11) NOTE: When a subsystem is further divided into another subsystem, the subsystem A is called System A, when referring to the new subsystem. For example, canines would be a subsystem of the system mammals; and in this instance, mammals would be System A and canines would be Subsystem A. Then, we could say that Bulldogs would be a subsystem of the system canines; and in this instance, the System A would be canines and the subsystem A would be Bulldogs.
Information Systems Model or Management Information System - a man-made system generally consisting of an integrated set of computer-based components and manual components established to collect, store and manage data and to provide output information to users. (pg 13)
Accounting Information System - specialized subsystem of the IS for the purpose of collecting, processing and reporting information related to the financial aspects of business events. Like the Information System (IS), the AIS may be divided into components based on the operational functions supported.
Logical Model of a Business Process:
(p.17-18) There are three logical components of the business process:1) Information process - the portion of the overall information system related to a particular system. Information processing includes data processing functions related to economic events such as accounting events, internal operations such as manufacturing, and financial statement preparation such as adjusting entries.
2) Operations process - a man-made system consisting of the people, equipment organization, policies, and procedures whose objective is to accomplish the work of the organization. Typically include production, personnel, marketing and sales, accounting, finance, warehousing, and distribution.
3) Management process - a man-made system consisting of people, authority, organization, policies and procedures whose objective is to plan and control the operations of the organization. Planning, controlling, and decision making are the three most prominent management activities.
IS serves two important functions within an organization:
1. Mirrors and monitors actions in the operating system by processing, recording, and reporting business events.2. Support management activities, including management decison making. The IS accomplishes this by collecting information and organizing in a manner that can be used by management to make informed decisions.
Management Uses of Information:
1. To monitor and keep operations running smoothly - the use of information generated and processed by the IS to ensure that events are operating correctly; ie Managers use the information to make sure enough inventory is being produced each day to meet expected demand = keeping the "ship" on course. (p17)2. To achieve satisfactory results for both customers and shareholders - The information generated by the IS can measure several things such as the attainment of goals regarding product quality, timely delivers, cash flow, operating income, etc. (p17)
3. To recognize and adapt to changing environmental trends- The Information from the IS helps managers to answer key questions such as: the time it takes to introduce a new product compared to the time it take competitors or the cost to manufacture a unit compared to the competition. (p17)
Data vs Information:
Data- facts or figures in raw form. Data represent the measurements or observations of objects and events. To become useful to a decision maker, data must be transformed into information.Information- data presented in a from that is useful in decision making (p17). It has value to the decision maker because it reduces uncertainty and increased knowledge about a particular area of concern. Should be useful in decision making.
Qualities of Information:
Statement of Financial Accounting Concepts No 2: Qualitative Characteristics of Accounting Information
NOTE: It is virtually impossible to simultaneously achieve a maximum level for all the qualities of information. In fact, for some of the qualities, an increased level of one requires a reduced level of another.
Management Decision Making:
- Decision making - process of making choices; central activity of all management.- One of the purposes of an IS to to support management decision making.
- Herbert Simon - 3 step Process (see figure 1.8 on page 23 of the textbook)
The Data Flow of Business Process Events
Structured vs Unstructured Decisions